Fitch Warns that US MMF Reform Threatens Cash Management Choices

US money market fund (MMF) rule changes would challenge the flexibility of these tools for corporate treasurers, many of whom rely heavily on MMFs for short-term cash management, according to Fitch Ratings. While exact measures have not been announced, the credit ratings agency (CRA) believes that reform efforts will affect both the industry and MMF investors.

Potential price volatility and associated accounting and tax implications of possible changes regarding net asset value (NAV) could sharply reduce the appeal of MMFs to many institutional investors. A recent Fitch survey of corporate treasurers in Europe found that 50% cited the simple tax and accounting treatment for constant net asset value (CNAV) MMFs as a main strength.

The change to require that MMFs switch to a variable net asset value (VNAV) from CNAV based on amortised cost accounting has been suggested by the US Securities and Exchange Commission (SEC) in the past and is likely still on the ‘short list’ of proposals. A VNAV structure would not necessarily alter how Fitch assigns ratings on MMFs and would offer investors additional price

transparency.

The addition of liquidity holdbacks and/or capital buffers may also be under consideration, adds Fitch. Mandatory liquidity holdbacks would create a host of issues for investors, especially for those engaging in active day-to-day cash management. While capital buffers would clearly provide additional credit and liquidity support, they would also introduce increased costs at a time of exceptionally low yields and new conflicts between traditional MMF investors and those providing the capital buffers.

The staff at the SEC, under the leadership of newly-appointed Mary Jo White, has indicated that further reforms of MMFs are likely to follow.

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